Time to change the wage-fixing system

The minimum wage in Korea will rise by 240 won to 9,860 won ($7.8) next year. The Minimum Wage Commission has finally come to an agreement after 110 days of debate, the longest period since the minimum wage-setting procedure was institutionalized in 2007. The decision was put to a vote after labor representatives rejected the public sector-mediated rate of 9,920 won. Next year’s minimum wage, therefore, went lower than what the public sector representing the government proposed.

The 2.5 percent increase from this year’s level would be the lowest after the 1.5 percent gain in 2021 amid the Covid-19 pandemic. The minimum wage has fallen short of the labor-demanded 10,000 won and the estimated nominal growth rate after adjusting for inflation — meaning more or less a cut. Still, even a marginal increase would be burdensome for the self-employed and small enterprises struggling with the radical wage hikes under the past Moon Jae-in administration. Over the last seven years, including five years under Moon, the minimum wage shot up by 52.4 percent. The Korean Federation of Micro Enterprise, which wanted a freeze in the minimum wage, lamented that the decision was “irresponsible and indifferent to the woes of small merchants.” They demanded that different minimum wages be applied to different jobs, starting with lodging and restaurants, to help ease their cost burden. But the commission refused it.

The minimum wage does not reach all workers. About 15.3 percent of the workforce, or 3.22 million, do not receive the statutory minimum wage, according to a 2021 survey. The ratio could go higher after the hike since many employers cannot afford the increase. It is an illegality even the government led by the prosecutor-general-turned-president cannot fix.

To ease the shock from the rise in the minimum wage, a differentiated rate system according to a worker’s age, industry and region must be considered. However, as this year’s painful decision-making process has shown, even raising the uniform minimum wage is hard to achieve. The rate-setting structure should be changed to allow systematic change.
Under the current wage-fixing structure, labor and management representatives lead the talks, while members of the public sector just mediate. It is a system common in South American countries. In advanced countries, the government leads the decision upon reflecting the views of the labor and management because the minimum wage is related to various other government policies, such as the lower limit of unemployment benefits. The government must be more active in the rate-setting procedure. The Minimum Wage Commission must iron out the differences through discussions while the government makes the final decision. That should be the right way to go.